Earlier today, the Justice Dept. and the Consumer Financial Protection Bureau announced the largest auto loan discrimination settlement in U.S. history with the news that Ally Bank has agreed to pay $98 million, including $80 million in refunds to settle allegations that it has been charging higher interest rates to minority borrowers of car loans.
Ally provides what are known as “indirect” auto loans to consumers, meaning it provides auto dealerships with loans at a set, risk-based interest rate and then allows the dealerships to add on a “dealer markup,” which can then be split between the dealership and Ally.
The Equal Credit Opportunity Act (ECOA) prohibits creditors from discriminating against loan applicants on the basis of categories like race and national origin.
In Sept. 2012, the CFPB says it began checking to see if Ally was in compliance with ECOA standards. This eventually led to a joint investigation with the DOJ, which concluded that Ally violated the law by charging African-American, Hispanic, and Asian and Pacific Islander borrowers higher dealer markups for their auto loans than similarly-situated non-Hispanic white borrowers. In total, some 235,000 borrowers paid higher interest rates than they should have.
According to the terms of the settlement [PDF], Ally must…
• Pay $80 million in refunds to harmed African-American, Hispanic, and Asian and Pacific Islander borrowers whose auto loans were purchased by Ally between April 2011 and December 2013.
• Pay an additional $18 million to the CFPB’s Civil Penalty Fund.
• Pay for the costs of a settlement administrator to distribute funds to victims.
• Monitor dealer markups to prevent future discrimination or eliminate dealer markups altogether.
The regulators warn Ally that continued use of a program that uses dealer markups may lead to annual payouts to borrowers whose loans are not in compliance with ECOA. The bank can avoid the constant monitoring by ditching the system, which the CFPB believes may encourage some dealers to charge discriminatory prices to maximize the markup.
The CFPB has already told all indirect auto lenders that they will be accountable for discriminatory pricing by dealers.
“Discrimination is a serious issue across every consumer credit market,” said CFPB Director Richard Cordray. “We are returning $80 million to hard-working consumers who paid more for their cars or trucks based on their race or national origin.”